Renewable Fuel Standard: Implications for land use changes in Malaysia and Indonesia
By Farzad Taheripour Wallace E. Tyner
Department of Agricultural Economics
Purdue University
22st Annual Conference on Global Economic Analysis Warsaw, Poland June 19-21, 2019
Renewable Fuel Standard: Implications for land use changes in Malaysia and Indonesia
Farzad Taheripour and Wallace E. Tyner
1. Background 1.1. Literature review and major contributions The land use change effects of biofuel production and policy has been examined frequently during the past decades. The early projections of these effects raised major concerns regarding the large magnitude of the land use change emissions that biofuel production may generate [1-3]. In the absence of actual observations, the early projections were basically obtained from hypothetical ex ante analyses [4]. The results of more recent studies that take into account actual observations and used more advanced tools show that induced land use changes due to biofuels have not been very large and hence land use emissions induced by biofuels could be much smaller than their early estimates [5-8]. Regardless of these findings, still public media and environmental groups express concerns regarding the US Renewable Fuel Standard and its global land use effects. In particular, more recently it has been argued that the US RFS is responsible for the land use changes in Malaysia and Indonesia (M&I) [9-10]. In response to these concerns, this paper offers the first comprehensive analysis of the link between the US RFS and land use change in M&I. We used a well-known advanced Computable General Equilibrium (CGE) model, dubbed GTAP-BIO, to evaluate the extent to which production of biofuels in US alters land use in M&I. Two recent publications presented the latest version of this model its background [6-7] We show that interactions among markets for vegetable oil are the main market-mediated drivers of these changes. We show the extent to which substitution among vegetable oils affects these results. Finally, we show that while production of biofuels induces relatively small land use changes in M&I, the share of M&I in induced land use change emissions of biofuels is large. We used the land use emissions model (dubbed AEZ-EF) developed by the California Air Resources Board to calculate these emissions [11]. This model assumes 33% of the expansion of oil palm in M&I falls on peat land. Recent evidence does not support this assumption and suggests lower shares for oil pam on peat. We show that adopting lower rates for oil palm on peat drops the estimated induced land emissions of biofuels significantly.
1.2. Evolution in markets for vegetable oils Global production of vegetable oils has increased rapidly over time, from about 61 Million Metric Tons (MMT) in 1990 to about 197 MMT in 2017, with an annual growth rate of 8.2%. An aggressive increase in supply of palm oil made this rapid expansion possible. In this time period, supply of palm oil (including palm kernel oil) has increased from 13 MMT to 77 MMT, with an annual growth rate of 18%. Due to this extraordinary growth rate, the share of palm oil in the global supply of major vegetable oils has increased from about 21% in 1990 to 40% in 2017. Most of the expansion in supply of palm oil occurred in Malaysia and Indonesia (M&I). This region is the main producer and exporter of this product and has the most carbon-rich biomes on the earth. Several papers have examined the environmental consequences of this rapid change [12-16]. The main focus of this literature was the environmental damage done when peat land was converted to palm plantation. This literature also has recognized that palm plantation is not the only driver of deforestation in M&I (17-19). Palm oil is mainly used as a food product (about 70%) and partly used in the production processes of cosmetic products (about 25%). Only a small fraction of palm oil (about 5%) was used as an energy source (including heating, electricity, and biodiesel). The share of biodiesel in global production of palm oil was less than 3% in 2016. While only a small fraction of palm oil is used for biodiesel production (mainly in the EU region), biodiesel production has been blamed for deforestation in M-I. Even more recently, it has been claimed that the US biofuel policy is responsible for deforestation in M-I (10), while the US does not use palm oil for biodiesel production and only imports a small share of the global supply of this product (e.g. about 2.2% in 2017) for food uses.
2. Method 2.1. Theoretical background The existing literature has shown that market mediated responses and resource constraints transfer impacts of producing a particular biofuel in one region (e.g. soy biodiesel in US) to the rest of the world, and that affects global markets for agricultural products and generates land use changes across the world [5]. Among all factors that shape market mediated responses, demand and supply elasticities play important roles. For the link between the US biofuel policy and land use change in M&I, interactions among vegetable oil markets and substitution among vegetable oils plays a critical role. That is because M&I is the main producer and exporter of palm oil, and the US is one of the largest producers and exporters of soybeans at the global scale. In this case, an increase in the production of soy biodiesel generates an additional demand for soy oil and that leads to increases in the prices of soybeans and soy oil in the US and also at the global scale, of course at different rates. Assuming some degree of substitution between palm oil land soy oil, that extends the US demand for palm oil (and perhaps elsewhere). This could generate an expansion in palm plantation in M&I and lead to deforestation in this region1. However, soy oil and palm oil are not the only vegetable oils produced and consumed across the world. The share of other vegetable oils in the global production of all major vegetable oils was about 33% in 2017, which is not a small share. Furthermore, M&I and US are not the only players in this game. Other countries are involved in markets for oil crops and vegetable oils and produce, consume, and trade these products. Hence, in analyzing the link between the US RFS and land use changes in M&I, we should take into account the substitution among all vegetable oils at the global scale. Figure 1 depicts interactions among these markets.
consumption/production of soy oil would be at the initial price𝐴𝐴 of . When the US begins 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 converting soy oil to biodiesel, say due to RFS,𝑄𝑄0 demand for soy oil at the𝑃𝑃 0global scale shifts up and right from to . Assuming no shift in the supply of soy oil, the equilibrium in this market 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 could move𝐷𝐷 to0 Point𝐷𝐷 1B. However, over time supply of soy oil may also shift right and down from to . With these shifts in demand and supply of soy oil, market equilibrium will move to 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 𝑆𝑆P0oint .𝑆𝑆 1At this equilibrium, the price of soy oil will be and its production will be . At 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 this equilibrium, the global consumption of soy oil for non1 -biodiesel uses will be and1 the 𝐶𝐶 𝑃𝑃 ′𝑄𝑄 𝑆𝑆𝑊𝑊 difference between and shows soy oil feedstock for biodiesel production. 1 ′ 𝑄𝑄 𝑆𝑆𝑊𝑊 𝑆𝑆𝑆𝑆 1 1 𝑄𝑄 𝑄𝑄 1 Production of corn ethanol also affects land use changes in M&I through the markets for vegetable oils as corn and soy are two major crops in the US. Producing more corn for ethnaol could reduce production of soybeans and that could alter the markets for vegetable oils as well.
Changes in the soy oil market will affect the market for palm oil as well, as presented in the bottom and left panel of Figure 1. In this panel the status quo equilibrium with no biodiesel production in US is shown at point . With the shift in the demand for soy oil and higher price for this product, ′ demand for palm oil will𝐴𝐴 shift to right and up from and . Over time, the supply of palm 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 oil will also shift to bottom and right from and 𝐷𝐷0 . The equilibrium𝐷𝐷1 point of market for palm 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 oil will move to due to these changes.𝑆𝑆 Due0 to the𝑆𝑆1 movement from to , price of palm oil ′ ′ ′ will increase from𝐶𝐶 to and production/consumption of palm oil 𝐴𝐴will increase𝐶𝐶 from to 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑊𝑊 at the global 𝑃𝑃scale0 . In𝑃𝑃 1a CGE model, similar to our model, one can trace these changes𝑄𝑄0 and 𝑃𝑃𝑃𝑃 measure𝑄𝑄1 interactions between these markets. For example, one can calculate the general equilibrium cross-price elasticity of changes in the global production of palm oil (in moving from point to point in the bottom and left panel of Figure 1) with respect to changes in the global ′ ′ price of𝐴𝐴 soy oil (in𝐶𝐶 moving from point to point in the top panel of Figure 1) using the following = 𝐴𝐴 𝐶𝐶 formula: , 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 . 𝑊𝑊 𝑄𝑄1 �𝑄𝑄0 −1 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 Similarly,𝑒𝑒 it is possible𝑃𝑃1 to� 𝑃𝑃calculate0 −1 this measure between these markets at regional levels. For instance one can calculate the general equilibrium cross-price elasticity of palm oil production in M&I with respect to changes in the global price of soy oil. Finally, consider the implications of changes in the global markets for soy and palm oils for the US imports of palm oil in the bottom and right panel of Figure 1. The US status quo demand curve for imported palm oil is shown with . With this demand curve, at the status quo price of palm 𝑃𝑃𝑃𝑃 oil (i.e. ), US imports palm oil by𝐷𝐷0 . After biodiesel production, the US demand curve for 𝑃𝑃𝑃𝑃 𝑃𝑃𝑈𝑈 imported𝑃𝑃 0palm oil will shift to , assuming𝑄𝑄0 some degrees of substitution between palm oil and 𝑃𝑃𝑃𝑃 soy oil. With this shift the US 𝐷𝐷will1 import palm oil of . The general equilibrium cross-price 𝑃𝑃𝑃𝑃 elasticity of changes in US palm imports with respect 𝑄𝑄to1 its global price can be calculated using = the following formula: , 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 . 𝑈𝑈𝑈𝑈 𝑄𝑄1 �𝑄𝑄0 −1 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 In short Figure 1 shows𝑒𝑒 how changes𝑃𝑃1 �in𝑃𝑃0 the−1 global market for soy oil, induced by biodiesel production in US, leads to change in the global market for palm oil and that affects US demand for palm oil. These changes depend on the rate of substitution between soy and palm oils at the demand side. When there is no substitution between soy and palm oils, demand for palm oil will not increase when price of soy oil goes up due to producing soy biodiesel in the US, or the US demand for imports of palm would not increase. To discuss the above analyses we focused on the interactions between palm and soy oil. However, in the real world, in addition to these two products, other vegetable oils such as corn oil, canola oil, cotton seed oil, sunflower oil, and many more types of vegetable oils are produced and consumed across the world and their markets interact. The CGE mode that we used in this paper, aggregates all types of vegetable oils into four groups including: soy oil, palm oil, canola oil, and other vegetable oils and fats, and traces their changes at the global scale by country. We will use this model to examine the extent to which these markets interact at the country and global levels. The model takes into account substitution among vegetable oils by country. We examine the extent to which the substations among vegetable oils affect the interaction among vegetable oils and how that affects land use changes in M&I and their corresponding land use emissions. Using this model, we calculate the general equilibrium cross- price elasticity of changes in palm oil production in M&I with respect to changes in the price of soy oil. We show how this elasticity responds to the changes in the substitution elasticities among vegetable oils.
2.2. Improvements in GTAP-BIO model The latest version of the GTAP-BIO model and its background are presented in Taheripour et al. [6] and Taheripour et al. [7]. We use and improve this model to reflect the impacts of biofuel production in the US on land use changes in M&I. The improvement addresses an important aspect of the links between livestock, vegetable oil, and biofuel industries and their land use implications. Taheripour et al. [20] have shown that over time the rapid expansion in supplies of soybeans and corn have increased availability of feed products and that helped the livestock industry to produce more animal based food products per unit of land and extend production of these food products much faster than population growth, while area of pasture land declined in recent years. This suggests that the livestock industry substituted feed with land in its production process. We modified our model to take into account this important fact into account. The modification alters the nesting structure the production functions of the GTAP-BIO model. Figure 2 represents the current nesting structure of substitutions among inputs in the GTAP-BIO production functions. As shown at the top of this figure, currently this model divides all inputs into two major branches of primary (including labor, land, capital and energy) and intermediate inputs (e.g. feed items for livestock). There is no substitution at the top of this production structure. This means no substitution between feed and land. However, this structure captures some degree of substitution between land, labor, and capital, which implies some degree of land intensification in response to higher land prices (more output per unit of land) for land using sectors, including livestock.
2.3. Examined experiment To examine the extent to which biofuel production in the US affects land use changes in M&I we developed two different sets of simulations. In the first set we allow all types of vegetable oils and oil crops to respond to the expansion in biofuels, as happens in real world. We refer to this set of simulations as Base Cases. In the second set, we alter the model closure to only take into account palm oil and soy oil and drop all other vegetable oils. We referee to this set of simulations as Restricted Cases. The second set follows the literature that only takes into account interactions between palm oil and soy oil and ignores other vegetable oils [10]. For the baseline and restricted sets we examine the impact of corn ethanol and soy biodiesel, separately. In both sets of simulation, for corn ethanol we shocked the model to increase its production from 2011 level to 15 Billion Gallons (BGs). This shock is about 1.1 BGs of ethanol. For the case of soy biodiesel we shock the model to increase its production by 0.5 BGs. The GTAP-BIO model uses a set of regional parameters to govern substitution among vegetable oils on the demand side including household and industries that use these products for non- industrial uses. The value of this parameter is about 0.5 for the US economy. Since this parameter basically governs the US demand for vegetable oils, we vary the magnitude of this parameter from 0.25 to 10 to examine the sensitivity of land use change in M&I with respect to changes in this parameter. Hence we examine the following experiments: Baseline experiments including all types of vegetable oils: - Expansion in US corn ethanol from its 2011 level to 15 BGs under alternative assumption for substitution among vegetable oils, - Expansion in US soy biodiesel from its 2011 level by 0.5 BGs under alternative assumption for substitution among vegetable oils, Restricted experiments including only soy and palm oil: - Expansion in US corn ethanol from its 2011 level to 15 BGs under alternative assumption for substitution among vegetable oils, - Expansion in US soy biodiesel from its 2011 level by 0.5 BGs under alternative assumption for substitution among vegetable oils. 3. Results (under development) Here we only present some findings for the case of soy biodiesel. An expansion of US soy biodiesel alters the market for palm oil, and that affects land use changes in M&I. However, the magnitude of these changes are quite small and vary by case. For, example, an expansion in the US soy biodiesel by 0.5 billion gallons increases the US imports of palm oil by 0.4% and that generates an expansion in palm plantation in M&I by 0.48% with only 6500 hectares expansion in cropland due to deforestation when all vegetable oils are included in the model, and the rate of substitution among vegetable oils in US is about 0.5. In this case, the induced land use change (ILUC) -1 emissions for soy biodiesel produced in US is about 17.5 g CO2e MJ . With a substitution elasticity of 2 among vegetable oils, the same expansion in biodiesel increases US imports of palm oil by 2.2% but that does not lead to more production of palm oil in M&I, as there is greater global trade of and substitution between other vegetable oils. Even some countries extend palm plantation on lands with lower carbon content compared to M&I. With a substitution elasticity of 2, ILUC -1 emissions for soy biodiesel drops to 16.6 g CO2e MJ .
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Shift in the global demand for
𝑆𝑆𝑆𝑆 soy oil induced by producing 𝑆𝑆𝑆𝑆 𝑃𝑃 B 𝑆𝑆0 soy biodiesel in US 𝑆𝑆𝑆𝑆 C 𝑆𝑆1 𝑆𝑆𝑆𝑆 A 𝑃𝑃1 𝑆𝑆𝑆𝑆 Shift in the global demand for 0 𝑃𝑃 palm oil induced by an increase 𝑆𝑆𝑆𝑆 𝐷𝐷1 in the price of soy oil
𝑆𝑆𝑆𝑆 𝐷𝐷0
′ 𝑆𝑆𝑊𝑊 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 𝑆𝑆𝑆𝑆 Global𝑄𝑄1 m𝑄𝑄arket0 for𝑄𝑄1 soy oil 𝑄𝑄
𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 0 𝑆𝑆 𝑃𝑃𝑃𝑃 𝑃𝑃 𝑃𝑃 𝑆𝑆1 ′ 𝐵𝐵 𝑃𝑃𝑃𝑃 ′ 𝑃𝑃𝑃𝑃 𝑃𝑃1 ′ 𝐶𝐶 𝑃𝑃1 𝑃𝑃𝑃𝑃 𝐴𝐴 𝑃𝑃𝑃𝑃 𝑃𝑃0 𝑃𝑃0 𝑆𝑆𝑆𝑆 𝐷𝐷1 𝑃𝑃𝑃𝑃 𝐷𝐷1 𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃 𝐷𝐷0 𝐷𝐷0
𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃 Global 𝑄𝑄market0 𝑄𝑄for1 palm oil 𝑄𝑄 US𝑄𝑄0 market𝑄𝑄1 for palm oil 𝑄𝑄
Figure 1. Changes in the global markets for soy and palm oil induced by producing soy biodiesel
in US and its impacts on the US imports of palm oil.
Figure 2. Existing nesting structure in GTAP-BIO production functions
Figure 3. Structure of feed composite in GTAP-BIO model
Figure 4. New nesting structure in GTAP-BIO production functions (SHOULD BE FIXED)